The Evolving International Monetary Order and the Need for an Evolving IMF

Abstract

Earlier this year, Martin Wolf of the Financial Times used his column pose an interesting question: If the International Monetary Fund did not exist, would we invent it? (1) His answer, at the risk of oversimplifying, was no, because today's world does not have the courage and vision create powerful multilateral institutions. We are not sure that we agree with his answer or with his reasoning for it, but we are sure that this is exactly the kind of question that needs be asked. What we would like do for the purposes of this article is take a slightly different approach Wolf's question. More specifically: If the IMF did not exist and we set out create it from scratch, what would be its role in the global economy? What should an IMF do, and what should it not do? Some might suggest that these very questions are being asked and answered right now within the IMF, in the context of the internal strategic review initiated by Managing Director Rodrigo de Rato. De Rato is be commended for taking on this task. But it seems us that the review, while important and useful, has been focused on finding better ways for the existing institution do what it already does. We would like approach this issue from a more basic level and ask: What is required for the IMF evolve into the best possible institution, designed for the global economy of the twenty-first century? For that evolution take place, the key shareholders of the institution need show leadership and vision. To set the stage for the discussion that follows, we will briefly review how and why the IMF came into being, and briefly consider how the global economy has evolved since the founding of the IMF. Next we will elaborate on what we see as the role for the IMF in today's global economy, and then discuss the changes that would need take place in order for the institution of today evolve into the ideal IMF. The Rise and Fall of Bretton Woods Let us begin by going back sixty years the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire. The delegates--representing forty-five nations--were nothing if not ambitious. They ended up creating two (almost three) international institutions. There was the International Bank for Reconstruction and Development--now known as the World Bank--charged with providing aid for the rebuilding of Europe. Delegates also came close creating the International Trade Organization, which was be dedicated keeping protectionism in check and facilitating freer international trade in goods and services. This organization eventually came into being a couple of years later as the General Agreement on Tariffs and Trade, which subsequently morphed into the World Trade Organization. And, of course, the third institution was the International Monetary Fund. The IMF was meant create an international monetary order that would allow trade flourish again and postwar reconstruction take place. The institution that these delegates created was very much a creature of its time, and its roles and responsibilities reflected the experience of the Great Depression. The great policy failure of the 1930s was the competitive beggar-thy-neighbor currency devaluations which nations resorted. The Bretton Woods delegates sought prevent countries from adopting such policies. The first of the Articles of Agreement that govern the IMF called on it to promote international monetary co-operation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. Exchange rates were be fixed and were be adjusted only in the case of fundamental disequilibrium. The delegates also correctly identified liberalized trade in goods and services and the promotion of economic specialization as crucial for the creation of wealth. …